Question regarding earnest money and hard money lending

[Jon Quigley]

Hello.  Here's a basic but key question regarding the mechanics of a purchase agreement on a property needing improvements (i.e. flip).  I'm new to flipping and have not built up a track record yet that could be leveraged for securing funding.    

In the case where I find a deal where major improvements will be needed on the property, either through a motivated seller or a wholesaler, I would sign a contract and would have to put down some earnest money.   But what happens if I think I can obtain financing (either through private or hard money) and I cannot secure funding by the time window on the contract runs out.  Wouldn't I lose this deposit?   This seems a relatively high risk.  What are some ways to prevent this risk, besides having several potential private/hm lenders on standby?  Assume the property fits the 70% rule. 

Thanks in advance

-Jon  

[LaTara G.]

Hi @Jon Quigley  one of the ways to minimize your risk would be to insert a financing contingency in the contract. A contingency is basically a statement (a “stipulation” it’s sometimes called) that is added to your contract that will allow you the right to back out of the deal without penalty under specific circumstances. For example :

Buyer shall have 15 days from the date of binding agreement (“Financing Contingency Period”) to determine if buyer has the ability to obtain a loan with the following terms:

* Loan Amount: 70% of the total purchase price of the property
* Term: 30 years
* Interest Rate: No Higher Than 5.25%
* Loan Type: FHA

This agreement shall terminate without penalty to Buyer if Buyer is unable to obtain the loan described above and notifies seller in writing of this event within the Financing Contingency Period.

Tara

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